Market Rally Will Continue Through July [Here’s Why I Am Bearish In August]

Posted 9:30 AM ET - Last Friday the S&P 500 rallied late in the day and it closed above horizontal resistance. Earnings season will start this week and buyers are typically engaged ahead of mega cap tech earnings. The economic numbers show signs of an economic recovery, but activity will be hampered by the growing number of new Coronavirus cases. Investors don't seem worried about a sluggish recovery. This light volume rally could reach horizontal resistance at SPY $324 in the next a few weeks. We are in a news vacuum and that typically favors the current upward momentum. Banks will dominate the early scene and this week we will hear from J.P. Morgan Chase, Citigroup, Wells Fargo, Goldman Sachs, PNC, Morgan Stanley and State Street. We can expect big write-downs and cautious guidance as the economy struggles to reopen. Banks will struggle to make money in a 0% interest environment. I don't believe financials will have much of a market impact. In two weeks, tech stocks will start reporting. States that remain in Phase 3 account for 40% of US GDP. Houston is considering an entire shutdown. This recovery is going to take a long time and credit concerns are likely to surface. There are many promising vaccines and treatments, but they still have to go through testing before they can be approved. Stimulus money is running out and Congress will have to pass another bill. Joe Biden leads in the polls by a healthy margin and he plans to repeal some of Trump's tax cuts. A lot can happen in three months, but as we draw closer to the election the market will decline if the polls still favor Biden. The election won’t be an issue for the next few weeks. I am slightly bullish though July, but my market bias is much more bearish into August. I still believe we have a few decent weeks where we can sell out of the money bullish put spreads, but we have to be very cautious after that. This is a low probability trading environment and we want to keep our size/trade count down. We only have a handful of positions right now so our risk is quite low. Day traders need to watch for a possible reversal on the open today. Gaps up to a new relative high have often been faded. Once we get through the first hour of trading, a gap reversal becomes less likely. We will use the 1OP indicator as our guide for the market. Financial stocks rallied on Friday and we may see follow-through this morning. Monitor the Buy into Earnings search in Option Stalker and look for stocks that are through the prior day’s high. These stocks have a tendency to rally into earnings. Mondays tend to be fairly dull so look for a compressed range today. There is small resistance at $319 and significant resistance at $323.40. Support is at $317.20 and $312. . .

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